Insurance broker lawsuit could mean more are coming

By

Published: Dec 21, 2006 10:55 a.m. ET

Share

(This article was originally published Wednesday)

CHICAGO (MarketWatch) -- Nearly two years after the four largest insurance brokers settled investigations into their compensation practices, the New York Attorney General's office sued the fifth-largest broker, Wells Fargo Corp.'s (WFC) Acordia Inc. unit, over the payments.

The lawsuit, filed Tuesday by New York Attorney General Eliot Spitzer in the State Supreme Court in Manhattan, charged that Acordia steered its customers' insurance business to insurers who agreed to make "secret payments" to Acordia, "placing Acordia's own financial interests ahead of the well-being of its clients." Parallel lawsuits were filed by attorneys general in Illinois and Connecticut.

Marc Violette, a spokesman for Spitzer's office, said Wednesday that the Acordia lawsuit isn't the end of the investigation.

"Contingent commissions is a ten-dollar word for kickbacks," Violette said, adding that brokers that still accept the commissions "have sold out the interests of their own customers in order to generate greater profits for themselves."

The New York suit seeks restitution for customers, disgorgement of illegal profits and penalties. According to the suit, the undisclosed payments amounted to nearly $200 million between 2000 and 2005.

In a Tuesday statement, Dave Zuercher, Acordia's chief executive, defended the payments, calling them "a long-standing and well-known practice" that have stood up to legal scrutiny in the past.

"Acordia is confident that contingent compensation agreements, properly administered, are consistent with the responsibility of its brokers to its customer," said Zuercher in the statement.

Acordia said it discloses its contingent compensation agreements to its customers in accordance with guidelines from the National Association of Insurance Commissioners, or NAIC, and that it will fight the allegations.

Acordia Lawsuit Follows Others

The lawsuits come more than two years after Spitzer settled similar allegations against the top three insurance brokers: Marsh & McLennan Cos. (MMC), Aon Corp. (AOC), and Willis Group Holdings Ltd. (WSH).

Illinois' attorney general brought a similar suit against the fourth-largest broker, Arthur J. Gallagher (AJG), that was settled in 2005. All the brokers promised to give up the lucrative commissions and have struggled to replace the income.

The payments used to be a large part of broker revenue. In 2003, the last full year it accepted them, Marsh, the largest broker, received $845 million in such payments, according to the New York Attorney General's office.

But even as the largest brokers have given them up, smaller brokers have by and large continued to accept the payments, which some of the larger brokers have called an unfair situation that puts them at a disadvantage to smaller competitors, and should be ended.

"Any broker that puts its clients first will find it increasingly difficult to rationalize the acceptance of contingent commissions from insurance companies," said Al Orendorf, a spokesman with Chicago-based Aon. "We support regulatory efforts to prohibit their use."

In 2004 testimony, Spitzer said "contingent commissions have infected practically every line of insurance business we examined." The practice "essentially creates a secret cartel based on hidden payments and preferential treatment. Like any cartel, however, this one results in higher prices for the public and a drag on the economy."

Following the settlements, the NAIC addressed the issue, adopting model legislation that stopped short of calling for a ban, but called for brokers to disclose the amount of compensation they received from insurers and the method for calculating it, including any contingent commissions. But so far, no states have adopted the legislation, said an NAIC spokesman.

The Council of Insurance Agents and Brokers said that only a few states have regulations on the issue.

The NAIC model legislation makes an exception to the disclosure of contingent commissions in cases where the broker represents the insurer and does not get paid by the customer.

That situation defines the relationship many smaller broker/agents have with insurers and insured, said Cory Walker, the chief financial officer of independent insurance agent and broker Brown and Brown Inc. (BRO).

Though the Spitzer lawsuits seem to use the term broker and insurance agent interchangeably, Walker said there is a difference between the two, and that contingent commissions are a fair way for insurers to pay agents who represent them to reward those who do a better job in helping insurers make underwriting decisions.

He said that Fortune 500 clients typically rely on brokers to set up complex insurance coverage, and they cannot easily get competing quotes from a variety of brokers.

Smaller companies that use independent agencies can more easily shop around, and those agents compete on price.

Insurers typically pay agents for keeping loss down by performing such services as providing guidance to companies on how to reduce their risk, and thus their premiums.

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.